Finding opportunity while raising pay
A three-pronged approach can help operators better deal with pressures to increase wages.
It remains to be seen how senior living will be affected by new pressures to raise minimum wages. What's not in doubt is that this is a good time for every senior living operator to plan for what the future might bring. Fortunately, practical responses exist that can generate a win-win scenario.
The minimum wage issue poses both an ethical dilemma and a real world business challenge. Two conflicting issues are emerging: 1) a legitimate moral and financial concern for lower paid, entry level employees versus a potentially serious fundamental business impact.
Many feel that modestly increasing the standard of living for lowly paid workers is the right thing to do. But price- and profit-sensitive businesses with high concentrations of low-cost workers are concerned. Industries like fast food would be dealing with several critical variables such as higher prices, possibly a lower customer base, or lower profits. Consideration is also being given to lowering cost by reducing entry level employee counts. Simply stated, the fast-food industry and other businesses may have to re-evaluate and adjust their business model.
There are also concerns that if the baseline minimum wage of $7.25 per hour (the current federal standard), is increased to at least $8.75 per hour, there could also be pressure to increase the hourly wages of other lower paid entry-level employees in an attempt to sustain the current offset from the increased minimum wage. New York, California, Oregon, Connecticut and Massachusetts have already set their minimum wage higher than $8.75 per hour. Other states already either have an official minimum wage of at least $8.00 per hour or are considering similar increases.
So how and why might this affect the senior living industry? There is a heavy concentration of entry level workers at a typical independent living or assisted living community. Those entry level positions typically include housekeepers, laundry personnel, cooks, servers, and other dietary employees, as well as drivers, security personnel, some maintenance positions, and healthcare workers.
Real world example
Let's look at a typical real world assisted living community called The Gardens at Westridge with 110 units and 55 full-time equivalent employees (FTEs). This staffing ratio of 0.5 FTEs per unit is a typical benchmark. In The Gardens, the types of lower wage earner workers mentioned earlier totals 43 FTEs. Their current entry level wages range from $11.00 per hour (housekeeper, laundry and some health care support, security and maintenance workers) to $11.70 per hour for CNAs.
There could eventually be pressure by workers, labor unions and other interest groups to attempt to sustain the current offset between minimum wage levels and other entry level worker pay. For example, if the minimum wage is increased by approximately $1.50 per hour, this offset, if also achieved by other workers, would have a significant financial impact on this assisted living community.
A financial sensitivity analysis of this issue conducted for The Gardens at Westridge revealed the following:
• Annual payroll increase of $149,800 or 10.2%
• Total expense increase of 4.5%
• Net operating profit margin decrease of 3.4% (from $1.5 million to $882,450 in net income)
At an 8.0% capitalization rate, the intrinsic value of The Gardens would decrease by approximately $1.9 million. Granted, the potential minimum wage increase impact on other entry level wages involves speculation at this time, but the change is very likely to occur.
There is a viable win-win solution to this potential financial dilemma. It involves three basic initiatives: 1) reducing overall operating expenses, 2) enhancing revenues and 3) realizing organic growth through increased occupancy and expanded services within the community. It is a very significant win-win solution because it addresses both the potential minimum wage financial impact and also improves the community's long-run financial performance.
While these three approaches have been addressed in earlier columns, they are particularly relevant here. They provide a real option for any operator trying to be fair to employees while growing the business.